Mexico Fiscal Reform Could Be Bad For Maquiladoras

The maquiladora export industry that is a key component of the United States-Mexico border economy could face major changes under proposed reforms to Mexico's tax system.

Mexico currently collects fewer taxes from its citizens and companies than almost any other developed country. And Mexico relies heavily on revenues from its state-run oil industry, which is in decline.

But Mexican President Enrique Peña Nieto wants to change this.

One way he wants to do it is by tightening control over the country's vast maquiladora export industry.

Factories that make and export goods to the U.S. and other foreign markets currently don't pay taxes on their raw materials and machinery.

But that would change under the proposed reform. Maquiladoras would have to pay the normal 16 percent sales tax on their raw materials, and then request a refund of that money when they export the final product.

That would require exporters to invest a lot more cash up front, said Héctor Vega, a tax partner with Deloitte Mexico. And it could erase some of the advantage Mexico has over its manufacturing competitors, Vega said.

"Because we are very close to the U.S. it's very natural doing business," he said. "However, this 16 percent will impact a lot and maybe determinate where you put your investment, either in China, either in Vietnam, either in Malaysia or keep it in Mexico."

Still, Vega is hopeful that the tax change affecting maquiladoras will ultimately be stripped from the final fiscal reform bill.